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Monday, June 08, 2009

Another month...another basket of bad news

I've been putting this off, but it's not going away.

The employment situation report for May came out last Friday (June 5), and, while the employment decline was less severe than most forecasters expected, a loss of 350,000 jobs does not count as good news. What might count as good news is that there was a small growth in the (seasonally-adjusted) labor force in May, but that's sort of counter-balanced by a continued decline in the employment-population ratio.

Even ignoring the labor situation (where the best we can say is that things are getting worse more slowly), there's not a lot of good news.

On the monetary front, the M1 money multiplier remains below 1. This means that bank reserves continue to be greater than checking account deposits in US banks. The M1 money multiplier has declined from about 1.7 in the first quarter of 2008 to about 0.95 in the first quarter of 2009. And, although M1 has increased fairly substantially (by about 14% between the first quarter of 2008 and the first quarter of 2009), the M1 velocity of money has declined by just about enough to offset it (down by nearly 13%).

Despite unprecedented growth in bank reserves (which were, in May, $903 Billion, up from $45 Billion a year earlier--an annual growth of 1900%), total bank lending is up only 3.3% between April 2008 and April 2009. Banks are maintaining a huge excess reserve position, apparently finding that a better option (especially now that bank reserves at the Fed are paying interest) than is making loans. (Bank lending was about 200 times bank reserves a year ago; now, it's only about 11 times bank reserves.)

For all of the Fed's efforts, we appear still to be in a liquidity trap.


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